Keeping The Dealing Desk Ahead Of The Regulatory Curve
Francis So, Head of Dealing, BNP Paribas Dealing Services, Asia Ltd, and Hubert Rotivel, Global Head of Dealing, BNP Paribas Dealing Services discuss ongoing regulatory challenges, and how the dealing desk can evolve and provide an alternative to execution orders.
Francis: Many of the challenges that we are currently facing in Asia are related to local regulation, but equally, in general trading, firms are facing many of these same regulatory issues globally as well. When referring specifically to China, the issues of concern are those regarding the Chinese regulators and their approach to the market. For example, earlier this year the market sold off aggressively and the regulators came in to implement a circuit breaker mechanism without much market consultation which obviously failed.
Currently, there is increased collaboration between regulators and market participants where the regulators are more open to input from external parties such as brokers and the buy-side. The budget for compliance has been growing but, with the adoption of new technologies that are required from a compliance point of view (both in terms of monitoring but also from an execution standpoint with regards to best execution), regulation is becoming increasingly costly.
Hubert: Transparency is really the topic of the moment in Europe. What the regulators want to achieve with MiFID II is transparency. MiFID I put in place competition but there were difficulties implementing transparency on the market. With MiFID II, the objective is to achieve transparency on the pre-trade and post-trade.
These same developments will eventually come Asia’s way. There are some markets in which it is likely to be easier to implement, such as Japan and Australia, which are already organised in the same way as Europe with liquid markets and some dark pools.
In terms of best execution, most regulators are now focused on asking investment firms and trading desks to ensure that they can provide evidence of best selection of broker for the trade. It is likely that the regulators will become more and more focused on this important issue and it will become essential for investment firms and trading desks to be able to provide this type of evidence.
In Europe, this evidence is linked to the mission criteria. When choosing a broker, you need to be sure that you can justify the decisions made in terms of broker choice. On the equities side, it may be that a particular broker can fulfil a market order most quickly and efficiently or another who might be able to reduce the impact on the market or one who might be the best provider of a particular algo for a market order.
If, as is likely, this will come to Asia in the future, it will be because the regulators were inspired by what they saw in Europe. Indeed, there has already been some contact between the APAC regulators and European regulators and in each case there are certain topics which are being continually revisited by regulators. This pattern often happens and it drives homogeneity of trading policy and rules which also takes account of local needs and market structure.
Francis: Many markets in Asia are ID based markets already. For example, China, Korea, Taiwan and Malaysia – these are all ID markets in which the regulators (if required) can get down to the detail of who the underlying investors are. In Hong Kong, they are also exploring the idea of an ID market but the question of whether it would be at a firm level or individual level still needs to be answered. The general trend is that the regulators’ main aim is increased transparency in terms of who is doing what.
What can firms do to get ahead of the regulatory curve to implement global best practices?
Francis: We are fortunate in that we are part of a global organisation. So there are global best execution policies which are followed in Europe as well as in Hong Kong. Even though the rules do not necessarily apply to Asia yet, at BNP Paribas we still follow those best practices. In terms of systems, there is also just one global order management system, so we have a view of what our Paris and London colleagues are doing and each of them has a view of what we are up to. In the event of a failure, each zone can cover for the other. This is just part of contingency planning and best practices that have been set in place.
Hubert: Just to confirm what Francis said, we share the responsibility to ensure that there is a team examining best practices and procedures across different locations. It provides an audit trail, as the first level of control is shared by three different desks in London, Paris and Hong Kong. For example, when we examined the algo trading regulations in Hong Kong, it was decided that we apply the same logic in Europe, so a workshop was organised with the brokers. At that European workshop we did due diligence and assessments of the different algos as we had done for Hong Kong and all the different locations benefit from the experience of the others.
It is very important that we apply this process across all locations. When we choose a tool, for example an Execution Management System (EMS), it will be considered not necessarily solely for one location but for all locations that could facilitate the workflow. It all relates back to efficiency. This process of integration began back in 2011 when the investment teams became global and it is vital that we continue to train our teams using this logical approach.
In each team, a specialist is identified for each different market and so we have people who are specialists in foreign trading and electronic trading. There will also be those who specialise in emerging markets and there will be some in the European small and mid-markets; they will know how to find liquidity more traditionally, how to develop good relationships with brokers based on trust, but they will also have the ability to use technology to source liquidity more technically.
Francis: The most important issue here is communication between the dealing desks. For example as a result of the HK SFC regulations regarding algo trading, we carried out a review of all of our brokers; ensuring that they met the required regulatory and compliance checks. In addition, it was necessary to ensure that the dealers in Hong Kong had sufficient knowledge and training on the use of different broker’s algos. We have also implemented pre- and post-trade checks on the broker as an additional layer of control. Because we started this process first and had access to all the information, we were able to provide this to Europe and show them what was happening in Hong Kong.
This is how we keep one step ahead of the regulators. We look at what is being applied by the regulators and see how we can adopt those best practices elsewhere. Take MiFID II for example, even though it is European-centric, here in Asia we are looking at those best practices and examining which of them can be applied within Asia.
Will there always be regional differences?
Hubert: Definitely – market structure is different from region to region. The market is becoming increasingly global so it is likely that best practice will become more transparent but underlying differences will remain. The regulators have to know what’s happening in their own markets but they will look to other regions for inspiration. This is evident in how they are increasingly regulating the buy-side and sell-side in similar ways to other regions.
Francis: Yes, market structure will continue to vary from region to region but the emphasis that the regulators are putting on the buy-side relates to events that may not have happened in those jurisdictions. That is why the buy-side is now increasingly responsible for taking control of their executions.